Year’s Volatility Upending Many Professional Market Timers

These are trying times for many professional market timers.

Timers--a breed of investment strategist who uses technical analysis to try to predict, and play, major market moves--are frequently finding themselves whipsawed by this year’s wild market swings.

“This is a very different kind of a market than we’ve seen for some time,” said Michael Burke, editor in chief of Investors Intelligence, a New Rochelle, N.Y.-based newsletter ([914] 632-0422; https://www.investorsintelligence.com; $184/year).

Some timers whose indicators normally change every 15 months have seen them change six times in six months, Burke said.

Take, for example, Dan Sullivan, editor of Seal Beach-based the Chartist ([562] 596-2385; https://www.thechartist.com; $175/year), a respected newsletter whose timing portfolio racked up annualized gains averaging 23.7% in the five years ended in December.

This year, through July, his timing portfolio was down 5.4%, according to Hulbert Financial Digest, which tracks newsletter performance. Sullivan’s been in, out and in the market again, trying to get a handle on it.

Typically, his average “buy” signal lasts 11 months, he said, but this year he got into the market March 17, not far from Nasdaq’s peak; out April 17, near its trough; then back in May 17. Ouch.

“We’re getting whipsawed, no doubt about it. We’re having a really bad year,” Sullivan said. “But if you have a methodology you have to stick with it. A lot of people spend their whole investment career trying in vain to find something that works.”

Doug Fabian, publisher of Huntington Beach-based Maverick Advisor ([800] 950-8765; https://www.fabian.com; $199/year), has also been through a wringer. He flashed his clients a new “buy” signal a few days before the recent Nasdaq market peak in mid-July. His portfolio sunk 13.3% this year through July, after gains averaging 21.8% a year from 1995 through 1999.

This year’s tremendous volatility appears to be upending many timing models, particularly those, like the Fabian strategy, that rely on prevailing market momentum.

The basic idea of timing is to take your cue from the market’s flow--but what if the flow is shifting radically from week to week?

“The Nasdaq chart is a mess,” said Alan Farley, founder of Hard Right Edge, a Littleton, Colo.-based Web site (https://www.hardrightedge.com) that teaches trading techniques. “It looks like someone simply threw mud on the wall.”

Timers, of course, prefer pronounced market moves, either up or down; they want to ride the up waves, and--unlike buy-and-hold investors--be on the sidelines for the down ones.

So far this year, the market’s ups and downs have given the overall impression of sideways movement--which is reflected in the Standard & Poor’s 500 index’s minuscule net change year-to-date.

As Fabian put it, “Trend following in a sideways market is tough. But we were whipsawed in 1990 and ’94 before we recovered, and we’ll snap out of it this time, too.”

The market’s internal dynamics have also played havoc with timers, as former tech-stock leaders have crumbled and sector rallies have flared, then quickly sputtered.

The trend can’t be your friend if there is no discernible trend.

Most timers base their buy-and-sell signals on proprietary models that use various technical measures, such as momentum among major stock indexes, the advance-decline line (which compares the number of stocks moving up versus the number moving down) and stocks’ intraday movements.

Many of their tools have arcane names such as Bollinger Bands, Japanese candlesticks, Elliott Wave and McClellan Oscillator.

Timers generally recommend model portfolios into which clients are supposed to shift their money when a “buy” signal is on.

These portfolios can include stocks, actively managed mutual funds, index or sector funds, exchange traded funds (which track the performance of an index or sector but trade like stocks) and cash, depending on how bullish or bearish the advisor feels.

The goal of all timers is to shift in and out of stocks at opportune points, minimizing bear-market exposure and maximizing gains. Some are far more trading-oriented than others, urging followers to jump in or out of the market monthly, even in normal markets.

“It’s not surprising many market timing models are falling upon hard times,” said John Bollinger, who runs the BollingerBands.com Web site (https://www.bollingerbands.com) and the Capital Growth Letter ([310] 798-8855; $112.50/year) based in Manhattan Beach.

“The trend models get eaten alive in this type of market, but that’s the price you pay. The benefit is that they’re going to be on the right side of the market’s major moves, up or down.”

The buy-and-hold crowd, however, argues that the payoff from timing isn’t worth the hassle.

Charles Carlson, editor of DRIP Investor ([219] 852-3220; https://www.dripinvestor.com; $99/year), a Hammond, Ind.-based newsletter geared to long-term investors, contends that timers are, well, wasting their time.

“Because they’re always trying to catch the trends, they end up generating a lot of transaction costs that cut into their long-term returns,” he said. “And one bad call can erase the gains from the previous 10 profitable calls. You have to make too many right decisions to outperform buy and hold.”

Still, some timers’ track records are impressive.

Jim Schmidt, editor of Timer Digest ([800] 356-2527; https://www.timerdigest.com; $175/year), a Greenwich, Conn., newsletter that monitors the performance of about 100 market timers, said several timers have managed to ring up princely gains this year.

For example, the Wolanchuk Report (https://www.wolanchuk.com; $8,000/year, or lower-cost trials at [900] 288-6663) of Roseville, Mich., returned 26.5% in the six months ended Aug. 11, and the Winell Report ([212] 697-7800; $100/three months) of New York returned 21.3% in the same span, according to Timer Digest.

According to Mark Hulbert, editor of the Hulbert Financial Digest ([888] 485-2378; https://www.hulbertdigest.com; $59/year) of Alexandria, Va., the 118 timing letters in his universe slightly outperformed the broad Wilshire 5,000 index through this year’s first seven months.

Not too shabby, considering that timers lagged the Wilshire in the preceding five-year bull run, Hulbert’s data show.

“When the market is going up like it had been, any attempt at timing is a bad idea,” Hulbert said. “Being fully invested pays off during those times.”

Now, however, timers whose models don’t rely on a prevailing up or down trend can add value in a choppy market--if they can seize on its twists and turns, Hulbert said.

Yet even timers on a roll this year aren’t necessarily gloating.

“We all go through slumps,” said Howard Winell, editor of the Winell Report. “My work started to malfunction, for lack of a better phrase, in 1996, and then eventually it started to work again. I can’t explain why that’s happened.”

Flexibility appears to be one factor benefiting certain timers. Schmidt said Don Wolanchuk of the Wolanchuk Report is known for using an “awesome number” of technical tools in his model.

Winell, meanwhile, said that although he is using the same set of tools as always, he now applies them separately to the Dow industrials, Nasdaq 100, the S&P; 500 and the New York Stock Exchange composite. “I’m looking at the market a little more under a microscope, not as a monolith,” he said.

The “hybrid” timing models used by many hedge funds and institutional investors, which emphasize identifying market turning points as well as playing overriding trends, are ultimately the best recipes for timing success, according to Bollinger.

Timers who are having a tough year, for whatever reason, say subscribers have reacted differently depending on their perspective.

“New investors have been disappointed,” said Sullivan, who was up 35%, 78% and 23% the previous three years. But he and Fabian said their longtime subscribers remain unshaken.

Farley of Hard Right Edge said the enthusiastic under-40 crowd he saw at money shows and trading-strategy seminars as recently as this spring has nearly vanished.

“It’s all gray hairs now,” he said. “We only get momentum markets 15% of the time, and the other 85% are trading-range markets. But momentum brings in a lot of new money that thinks it’s real smart for a while.”

Simple human nature keeps many timer clients from staying the course, Bollinger said. “Rather than show faith, they say the model is broken and it gets abandoned. So when it comes back into sync with the market again, of course they miss out.”

Sullivan said some of his competitors also have been antsy. “They are beginning to question their models,” he said.

Although tweaking a time-tested model can pay off, as it did for Winell after his slump, it can also be dangerous.

Said Fabian: “I’ve tried tinkering in the past and I’ve got the scars to prove it.”

Carl Swenlin, publisher of Redlands-based Decision Point Alert, Rydex Timer and other online newsletters ([909] 793-8962; https://www.decisionpoint.com; $30/month), said he has added a shorter-term tool to try to get a better grasp on this fast market.

“We’re trying to navigate the tighter turns,” he said. “This whole thing is an ongoing process. You never know everything you need to know, and you’re always learning.”

Al Frank, editor of the Prudent Speculator ([800] 258-7786; https://www.theprudentspeculator.com; $175/year) in Laguna Beach, believes an unwavering approach has paid off. His newsletter has the top 20-year ranking from Hulbert based on absolute return (not adjusted for volatility risk).

“We use a modest form of market timing,” said Frank, who also relies heavily on fundamental analysis. “We’re always fully invested, but when the market is oversold we’re more aggressive in buying stocks with new money and on margin.”

He adheres to a value discipline, picking stocks that look cheap relative to sales, earnings and book value. “In other words, the perfect time to buy a stock is when nobody wants it,” he said.

Frank’s average holding period: more than six years.

“Pure timers are finding that the trend is your friend--until it reverses,” he said. “But in the long run, value is always timely.”

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Times staff writer Josh Friedman can be reached at josh.friedman@latimes.com.

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Hard Times for Some

Here is a sampling of how market-timing newsletters have performed this year through July, compared with the previous five years.

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-Total return of timing portfolios- 1995-99 Newsletter (annualized) ’00 YTD* Timer Digest +23.6% +2.7% Investors Intelligence +19.2 -2.8 Chartist +23.7 -5.4 Prudent Speculator +47.1 -11.9 Maverick Advisor +21.8 -13.3 Wilshire 5,000 index +27.1 -2.9

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*Through July 31 (not annualized)

Source: Hulbert Financial Digest